Business is risky. Some risk, of course, is good – but it needs to be managed. Consider the dangers of preparing your own tax returns. Your accountant’s special expertise lets you “manage” the risk of paying higher taxes and penalties, allowing you to focus on other business priorities.

Risk Management (“RM”) is partly an art, involving hypotheses and intuition about the uncertain nature of risk and the severity of its impacts. It’s also a science – a disciplined, pro-active process to:

  1. Identify and understand the possible risks
  2. Create prevention, contingency and crisis management plans
  3. Choose appropriate financing (not just insurance)

Let’s take the example of a fire — still the most frequent cause of loss for small and mid-sized firms. Assume it causes substantial damage to your business and downtime of two months. How can you “manage” this risk in advance?

Step one:

Assess the possible impacts on your operations. Think about ruined furniture; smoke damage to equipment; destroyed stock, marketing material or templates you use to deliver services; injury to a key employee; customers going elsewhere for immediate needs. What other impacts are unique to your business? This helps you assess the extent and consequences of a loss.

Step two:

Plan to prevent losses. What can you do to prevent a fire from happening? No smoking policies, heating system maintenance and minimizing stockpiles of flammables are examples. Some businesses will move key operations to a more fire resistant building.

Prevention also includes plans to reduce the impact of a fire that does occur. Alarms, extinguishers, and sprinklers are good physical protection that stimulate quick action. Other measures might include:

  • Accessible data backups – don’t forget customer lists
  • Communication strategies to prepare messages for customers, suppliers and the media
  • Mutual agreements with other business owners to share office or work space on a temporary basis
  • Plans of how and where to obtain replacement equipment quickly

Step three:

Choose the right ways to pay for losses and expenses.

  • Self-insurance, or deductibles, is a good place to start. Quality loss prevention plans can make higher deductibles more appropriate, and bring significant savings.
  • Transferring risk to others – if you can negotiate this – is also very effective in certain circumstances. For example, tenants assume some of the owner’s risks in a lease, and maintenance companies do the same in a service contract.
  • Get ideas and examples of hold harmless or indemnity clauses from your lawyer, insurance broker or consultant.

Step four:

Buying insurance must be your last decision, after RM has shown you what and how much you really need. Careful analysis of coverages, exclusions, limits, conditions and your special requirements is important.

Proper RM plans will reduce the chances of that fire occurring, and can mitigate many of the expenses and surprises if it actually does happen.

  • You’ll be prepared to contact clients and suppliers immediately, find alternative equipment and space to minimize downtime, and assist your injured employee to get back to work as soon as possible.
  • The right insurance coverage will be tailored to your needs and budget, provide advance payments, and respond to your business interruption downtime.
  • Finally, you’ll have the peace of mind to seize new opportunities for advancing your business with less worry about what you have now.

You can call or email me any time with questions or concerns (510-685-3883 | There’s never a charge for brainstorming.